Prime minister says Spain faces tough year ahead

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Madrid • Spain faces another tough year as it grapples with recession, a deep financial crisis and 25 percent unemployment, its prime minister said Friday.

In his end-of-year assessment, Mariano Rajoy said the country's crisis had been worse than anticipated.

"We are facing a very tough year, especially in its first half," he said. "Spain's economy will remain in recession for some time, but we expect it will improve in the second half of 2013."

While Rajoy was speaking, investor concerns government over attempts to shore up the main cause of Spain's problems  its shaky bank system  sent shares in lender Bankia falling nearly 27 percent.

Spain's economy has been hit hard by the collapse of the country's property market in 2008, which left ordinary Spaniards and banks struggling under the weight of toxic loans and assets. The country's government rushed to prop up its financial system, sending its debt levels higher.

To get its deficit under control, the government introduced a series of harsh austerity measures, such as spending cuts and tax rises. This has had a damping effect on the Spanish economy, pushing it into recession and driving up unemployment.

In its bid to overhaul the financial industry, Spain had to seek a $132.7 billion lifeline from the 17 European Union countries to strengthen its failing banks. Some analysts said Rajoy acted too slowly to shore up failing banks. "Some measures, like bank restructuring, were taken too late," said Guillermo Aranda, CEO at ATL Capital investment company.

The prime minister said Friday that structural reforms and "the restructuring of the financial sector" were key elements in Spain's road to recovery.

However, the stock market showed it was not convinced by the progress made, as shares in Bankia SA fell for a second day, dropping 27 percent as investors rushed to offload their holdings in the bank.

Bankia was formed in 2010 in a merger of seven troubled and unlisted Spanish savings banks, and was floated on the Spanish stock exchange last year. Its shares, a large number of which were sold to individual savers and pensioners, have fallen nearly 80 percent in value since the floatation.

Officials with the country's bank bailout fund  the Fund for Orderly Bank Restructuring  revealed late Wednesday that Bankia was worth minus $5.5 billion. The bank's negative value  a result of combining the bank's current balance sheet with the level of business it is expected to generate in the future  was due to worse-than-expected losses of $4.2 billion on toxic property investments.

FROB has used the negative value to determine the size of Bankia's capital injection. The bank, and parent company Banco Financiero y de Ahorros, have received a $24 billion bailout to strengthen their balance sheets  $6 billion of which was paid in September.

In a statement released Thursday, BFA said it had received a capital increase of $18 billion. Bankia itself will receive $14 billion of this in the form of bonds.

With both of these operations completed, the BFA-Bankia group said its capital ratios would be "above legal requirements" and would increase its capital levels over the next three years to $7 billion.

However, investors have been offloading their shares in Bankia over the past few days because the $14 billion in bonds will convert into shares next year, thereby significantly diluting the value of existing stock.

As a result of the capital increase, Bankia will be suspended from the IBEX-35 index of leading Spanish shares in January.

In his address Friday, Rajoy acknowledged that some of the measures went against the manifesto commitments with which his party won elections by a large majority in November 2011. He said he was keenly aware of the wave of "skepticism, disappointment and mistrust" that was palpable throughout Spain.